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Understanding LEAPS: Using the Most Effective Options Strategies for Maximum Advantage by Allaire

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CHAPTER 20Option Price Behavior

In the previous chapter we outlined the variables used to calculate the value of an option. Given the five variables listed, one can estimate the price at which an option should be trading. Then the real world intervenes, and the variables start to change: The price of the underlying stock moves up or down, every day expiration is a little nearer, and the market may reduce or increase its volatility estimate. So what happens then to the price of our options? This chapter looks at how changes in the five variables affect options’ prices.

THE UNDERLYING STOCK

As the price of a stock moves up and down, so will the values of options on this stock. To illustrate this point, take Justa Theoretical Stock (FLUF), which ...

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